Taxability of Sovereign Gold Bonds w.e.f. FY 2024-25

Summary: Sovereign Gold Bonds (SGBs) are government securities issued by the Reserve Bank of India on behalf of the Government of India, denominated in grams of gold. They offer an alternative to physical gold investments. Eligible investors include Indian residents such as individuals, HUFs, trusts, universities, and charitable institutions, with joint holdings and minor investments allowed under guardian application. The minimum investment is one gram, with maximum limits of 4 kg per individual or HUF and 20 kg per trust per fiscal year. SGBs bear a fixed annual interest rate of 2.50%, credited semi-annually. Redemption occurs in Indian Rupees based on the average gold price over the last three days, with early redemption allowed after five years. SGBs can be traded on stock exchanges if held in demat form, and can be gifted or transferred. Tax implications include tax-free redemption proceeds and exempt capital gains on maturity, while interest income is taxable. SGBs are also subject to capital gains tax depending on holding period and transfer method, with specific rules for stock exchange and direct transfers. Always consult a financial expert for personalized advice.

1. What are Sovereign Gold Bonds (SGBs)? Who is the issuer?

• SGBs are government securities denominated in grams of gold.
• They substitute physical gold..
• The Bond is issued by Reserve Bank on behalf of Government of India.

2. Who is eligible to invest in the SGBs?

• Persons resident in India as defined under Foreign Exchange Management Act, 1999 are eligible to invest in SGB.
• Eligible investors include
  • individuals,
  • HUFs,
  • trusts,
  • universities and
  • Charitable institutions.
  • Individual investors with subsequent change in residential status from resident to non-resident may continue to hold SGB till early redemption/maturity.

 3. Whether joint holding will be allowed?

Yes, joint holding is allowed.

4. Can a Minor invest in SGB?

Yes. The application on behalf of the minor has to be made by his/her guardian.

5. What is the minimum and maximum ceiling limit for investment in SGB?

• For Individuals and HUFs: Minimum investment in the Bond shall be one gram with a maximum limit of 4 kg for individuals and Hindu Undivided Family (HUF) and
• 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March).
• In case of joint holding, the limit applies to the first applicant.

6. What is the rate of interest and the method of payment of interest?

• The Bonds bear interest at the rate of 2.50 per cent (fixed rate) per annum on the amount of initial investment.
• Interest will be credited semi-annually to the bank account of the investor and the last interest will be payable on maturity along with the principal.

7. What is the procedure for redemption?

• On maturity, the Gold Bonds shall be redeemed in Indian Rupees and
• the redemption price shall be based on simple average of closing price of gold of 999 purity of previous 3 business days from the date of repayment, published by the India Bullion and Jewelers Association Limited.

8. Is premature redemption of SGB allowed?

• Though the tenor of the bond is 8 years,
• However, early encashment/redemption of the bond is allowed after fifth year from the date of issue on coupon payment dates.
• The bond will be tradable on Exchanges, if held in demat form. It can also be transferred to any other eligible investor.

9. Whether the bonds can be gifted to a relative or friend on some occasion?

• The bond can be gifted/transferable to a relative/friend/anybody who fulfills the eligibility criteria
• The Bonds shall be transferable in accordance with the provisions of the Government Securities Act 2006 and the Government Securities Regulations 2007 before maturity by execution of an instrument of transfer which is available with the issuing agents.

10. What are the tax implications on i) interest and ii) capital gain?

• Interest on the Bonds will be taxable as per the provisions of the Income-tax Act, 1961 (43 of 1961).
• The capital gains tax arising on redemption of SGB to an individual has been exempted.
• The indexation benefits will be provided to long terms capital gains arising to any person on transfer of bond.

11. Is tax deducted at source (TDS) applicable on the bond?

• TDS is not applicable on the bond.
• However, it is the responsibility of the bond holder to comply with the tax laws.

12. How to trade these bonds?

• The bonds are tradable from a date to be notified by RBI. (It may be noted that only bonds held in de-mat form with depositories can be traded in stock exchanges) The bonds can also be sold and transferred as per provisions of Government Securities Act, 2006.
• Partial transfer of bonds is also possible

14. Taxability of SGBs Explained:

Sovereign Gold Bonds (SGBs) issued by the Government of India can indeed be taxed in various ways, depending on the nature of the transaction. Here’s a detailed look at the tax implications for each scenario (applicable w.e.f. FY 24-25):

1. Transfer through Stock Exchange (applicable to all types of investors)

When Sovereign Gold Bonds are sold on the stock exchange:

• Capital Gains Tax: The gains made from selling SGBs on the stock exchange are considered capital gains. The tax treatment depends on the holding period.
  • Short-Term Capital Gains (STCG): If the bonds are held for 12 months or less, the gains are taxed as short-term capital gains (date of transfer is excluded from holding period in all cases). These are taxed at the individual’s applicable income tax slab rate.
  • Long-Term Capital Gains (LTCG): If the bonds are held for more than 12 months, the gains are considered long-term. Long-term capital gains on SGBs.
    • In this scenario there can be two options with the investor:
      • SGBs are transferred after 23/07/2024, then tax rate is 12.5% without indexation ( new regime)
      • SGBs are transferred  before 23/07/2024,then the investor has the option of either opting new regime mentioned above or
      • Alternatively, He can opt for old regime, which is 20% tax rate with indexation and 10% without indexation.

2. Direct Transfer (Sale to another person) (applicable to all types of investors)

When SGBs are transferred directly to another person (outside of the stock exchange):

• Capital Gains Tax: The tax treatment is similar to that of transfer through the stock exchange.
  • Short-Term Capital Gains (STCG): If the bonds are held for 24 months or less, the gains are taxed as short-term capital gains. These are taxed at the individual’s applicable income tax slab rate.
  • Long-Term Capital Gains (LTCG): If the bonds are held for more than 24 months, the gains are considered long-term. Long-term capital gains on SGBs.
    • In this scenario there can be two options with the investor:
      • SGBs are transferred after 23/07/2024, then tax rate is 12.5% without indexation ( new regime)
      • SGBs are transferred  before 23/07/2024,then the investor has the option of either opting new regime mentioned above or
      • Alternatively, He can opt for old regime, which is 20% tax rate with indexation and 10%  tax rate without indexation.

 3. Redemption by RBI (applicable to individuals only)

When SGBs are redeemed at maturity (which is typically after eight years, with an option for early redemption after the fifth year):

• Tax on Interest Income: The interest income earned on SGBs is taxable. This means that the annual interest of 2.5% p.a. paid on SGBs is added to the income of the investor under the head income from other sources.
• Tax on Redemption Proceeds: The redemption amount received upon maturity is tax-free. The principal amount and the final redemption value, which includes the appreciation in value, are not subject to tax.

Summary

• Stock Exchange Transfer: Taxed as capital gains—STCG or LTCG based on the holding period.
• Direct Transfer: Taxed similarly to stock exchange transfer—STCG or LTCG.
• Redemption by RBI: Tax-free

Imp note: Always consult with a tax advisor or financial expert to ensure compliance with the latest tax regulations and to receive personalized advice based on your specific situation

****

The author is a Lucknow based Chartered Accountant and can be reached at [email protected]. His Youtube channel #bhupeshacc can be visited for better understanding of the topic.